The Uncertainty Problem and the Great Recession

Government intervention has businesses on hold and keeps job growth sluggish.

By

Gary Wolfram, Ph.D.

November 7, 2012 - 9:16am

Voters
headed to the polls Nov. 6, and for many their greatest concern was the
U.S. economic situation. Although The Great Recession ended more than
three years ago, growth has remained slow and job growth sluggish.

If
we look at the recent Great Recession, real GDP fell by 3.7 percent,
8.9 percent, and 5.3 percent during the third and fourth quarters of
2008 and the first quarter of 2009 respectively. In the second quarter
of 2009, GDP fell by .3 percent, but grew slowly every quarter since. So, technically, the recession has been over for more than three years.

But unemployment remains a major problem.

The
unemployment rate peaked at 10.1 percent in October 2009, actually
lower than the peak unemployment of the recession of the early 1980’s,
which peaked at 10.8 percent in December 1982. The unemployment rate
remained above 8 percent for 27 months from November of 1981 through
January of 1984 during the Reagan recession. This time, the
unemployment rate stayed above 8 percent for 43 months during the Obama
administration, only dipping to 7.8 percent in September with a large
drop in labor force participation.

Why
have we had such a slow recovery from the recession? Why has the labor
market been so slow to rebound? The answer is regime uncertainty, the
same kind of uncertainty Franklin Delano Roosevelt’s administration
created that stymied recovery from the Great Depression.

American
economist Robert Higgs wrote a paper about the Great Depression in 1997
entitled “Regime Uncertainty.” It was also republished in his book, Depression, War, and Cold War.
In it, Higgs explained the length and breadth of the Great Depression
by focusing on the massive government intervention in the economy that
created so much uncertainty as to what the rules of the game were that
business halted investment.

He
quoted financial economist Benjamin Anderson concerning the outpouring
of new federal laws and regulations: “The impact of these multitudinous
measures—industrial, agricultural, financial, monetary and other—upon a
bewildered industrial and financial community was extraordinarily
heavy.”

Higgs’s
point was that the “regime uncertainty” created by the Roosevelt
administration kept businesses from investing in new factories and
machines and from hiring new employees. This is what kept the economy
from expanding and employment from increasing for such a long time. And
it is the same problem we face in 2012.

The
U.S. economy continues to deal with slow growth and high unemployment,
rather than quickly rebounding. Real GDP growth remains sluggish,
growing at 1.3 percent in the second quarter of this year and 2 percent
in the third quarter. It has grown faster than 2.6 percent in only two
quarters of the entire recovery period.

Just
as large a problem is how long many people have been unemployed. Almost
5 million people were unemployed longer than 26 weeks in September,
making up 40.1 percent of those unemployed. In September, the median
number of weeks people have been unemployed was 18.5, more than double
what it was in January of 2008.

The
reason for these enduring growth and labor market problems can be found
in the regime uncertainty created by the Obama administration.

They
enacted a 2,800 page health care bill with 20,000 pages of regulations,
and more yet to be written. That has created unintended consequences
and an uncertain future for our health care industry. They got a 2,300
page financial regulation bill with 243 Rules, and 67 studies, passed.
After Cap and Trade legislation was defeated, the EPA began regulation
of carbon in ways that have led to the closing of some coal-fired power
plants and uncertainty about the future of others. The Bush Tax cuts
have also been threatened, then temporarily extended, and now are set to
expire when we hit the “fiscal cliff” in January.

Imagine
how all of this impacts business decision making. Suppose you are the
owner of three car washes and are thinking about opening up a fourth
one, investing $300,000 in a building and equipment and hiring ten new
people. First, you don’t know what the health care costs of these new
employees are going to be, since that will be up to the Secretary of
Health and Human Services under the Affordable Care Act. Second, you
don’t know what our electricity costs are going to be as the EPA delves
deeper into regulation of the power industry. Third, you don’t know
what your income tax liability will be, since you file as a sole
proprietor or LLC and pay under the personal income tax.

Given
all this uncertainty, not counting the activist Federal Reserve policy
that could alter interest rates at the next monthly meeting, it is
likely that you will simply not invest right now and wait until there is
a more stable set of rules of the game. If you do hire anyone, it will
be part-time where you don’t have to deal with the Affordable Care Act
and can respond quickly to the unknowns created by your government. This
is a reason why the number of people who are employed part time who
would like full time work was at more than 8.6 million in September.

Continual
massive government intervention sustained the Great Depression and is
weighing down the current economy. We will continue to slog along at 2
percent growth and unemployment near 8 percent until certainty about the
rules of the game is restored, or until we regain what Friedrich Hayek
called the Rule of Law over the Rule of Man.

Gary Wolfram is the William Simon Professor of Economics at Hillsdale College.